From the author of

From the author of

Many IT shops have discovered that large chunks of their costs have not been
budgeted properly. In response, consultants have come up with new Total Cost
of Ownership (TCO) models for accurately costing today's distributed
computing systems, and for reflecting previously unbudgeted expenses.

What Is Total Cost of Ownership (TCO)?

The TCO of a computing system is an organization's total cost for
acquiring and maintaining that system. Once, many IT professionals only
factored in the costs of purchasing hardware and applications. This wasn't
surprising—they grew up in the relatively easy-to-manage world of
mainframes, where these were by far the most important costs to consider. Now,
however, in the era of e-business, PCs, and client/server systems, the amount of
work needed to manage and maintain systems has become overwhelming.

End users can't be blamed for taking it upon themselves to deploy
departmental applications, when a few years ago they couldn't get their
mainframe gurus to deliver solutions quickly enough. But now that these systems
are in place, there are more components, locations, and users to manage—and
the costs of computing now go far beyond the costs of acquisition.

What should go into the computation of the TCO of any system?

Acquisition cost comprises the cost of acquiring the system, and
includes these costs:

Research possible products to buy.

Design the system and all the necessary components to ensure that
they work well together.

Source the products, which means getting the best possible deal
from all the possible vendors.

Purchase the products—the selling price as negotiated with
the chosen supplier.

Install the system.

Develop or customize the applications to be used

Train the users

Deploy the system, including transitioning existing business
processes.

Cost of maintaining availability of the system to the end users, which
covers these areas:

Systems management, including every aspect of maintaining normal
operations, such as activation and shutdown, job control, output management,
backup, and recovery.

Maintenance of hardware and software components, including
preventive and corrective maintenance and housekeeping.

Environmental factors, including a system's external
requirements for proper operation, such as air conditioning, power supply,
housing, and floor space.

Other factors that don't fall into any of the above
categories, depending on the type of system deployed and the prevailing
circumstances.

All these categories seem straightforward, but quantifying each cost is
difficult or even impractical in today's world, because few organizations
have an accounting practice that's mature enough to break down expenses in
sufficient detail.

For example, we know of no organization that records all employee activities
by task, information you would need to answer questions like these:

So what's the value of knowing a system's TCO? Obviously, our
objective is not to calculate exact figures. Rather, you need to understand what
these costs could reasonably be in your organization. You must plan for
these costs, even if you can only roughly estimate them. The TCO also provides a
good basis of comparison between alternative system deployment strategies,
between platforms, and between competing products.